to the World Trade Organization (WTO) in the case brought by China against these measures, “China’s acts, policies, and practices addressed in the relevant Section 301 Report amount to ‘state-sanctioned theft and misappropriation of U.S. technology, intellectual property, and commercial secrets’” (WTO 2020, para. 7.100). As for the scale of trade secret theft, this has been placed as high as between $180 billion and $540 billion annually for the United States alone by the Commission on the Theft of American Intellectual Property (Blair and Huntsman, Jr. 2017, 11). These estimates, however, have been called into serious question. Methodologically, they depend on a 2014 study (Michel, Stronberg and Geday 2014) that generates an estimate of the value of trade secret theft based on statistical guesstimates of the scale of various other illegal activities, such as narcotics trafficking, corruption, occupational fraud and illicit financial flows, rather than, for example, building up an estimate from actual evidence of cases of theft. As observed by Stephen Roach (2019), “it takes a rather large leap of faith to convert this information into the 1–3 percent of GDP that the IP Commission claims is lost to theft of intellectual property.” The foregoing observations establish that the protection of trade secrets is an increasingly important issue for economic governance in the modern data-driven economy. In particular, given the large and growing role of trade secrets as a legal instrument of choice in corporate strategies to protect corporations’ valuable IP, there are grounds for updating legal protections for companies relying on trade secrets laws, including through international agreements and enforcement mechanisms. At the same time, the widely cited estimates of the costs of trade secret theft as being in the order of one–three percent of GDP have been called into question, and there are significant gaps in the literature on the impacts of trade secret protection on innovation, trade and investment (Linton 2016). This paper seeks to provide insights for policy makers into the open questions in this area: the extent to which trade secrets protections need to be strengthened as opposed to simply modernized, and whether there is any support for the much more serious charges concerning large-scale leakage of technology via trade secret theft that have been made to support the trade and technology war.
The paper is organized as follows. It first sets out the current policy setting for the treatment of trade secrets. It then considers the empirical evidence on trade secret theft, including the channels through which such theft typically occurs, and what this means for international leakages of technology. Against this background, the paper critiques the current approach to quantifying trade secrets theft on first principles grounds by considering international trade secret theft as a form of crossborder disembodied technology flow. The paper further considers how such flows might properly be evaluated and how these values compare to the totality of cross-border technology flows. The conclusion discusses the implications for policy.
Background Some Trade Secret Basics Trade secrets, which, in law, may also include undisclosed — or confidential — information, constitute the fourth leg of the IP stool, alongside patents, trademarks and copyright (see, for example, Pooley 2013). Trade secrets are an important resource for companies whose intangible assets are not patentable but have commercial value. Trade secrets may come in different forms, including a formula, pattern, compilation, program, device, method, technique, process or algorithm. Some of the best-known examples of trade secrets are Coca-Cola’s recipe, the KFC coating recipe and Google’s internet search algorithm. Notably, a trade secret can involve “negative” information — knowledge about “research blind alleys, failed designs, and methods that do not work” (Saunders and Golden 2018, 72). To qualify as a trade secret, the information in question must generally meet three criteria: it must have either actual or potential independent economic value by virtue of not being generally known; it must have value to others who cannot legitimately obtain the information; and it must be subject to reasonable efforts to maintain its secrecy (United States Patent and Trademark Office 2020). If any of the three criteria ceases to be met, the trade secret ceases to exist. Unlike protection for patents and copyrights, trade secret protection is not limited in term.
Quantifying Trade Secret Theft: Policy Implications
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